USDSGD…………..A Reprieve………….to 1.5283 on May 2nd 2007

In the past month, USDSGD hit a low of 1.5092 on April 19th and a high of 1.5282 on May 2nd. USDSGD closed on Friday, May 4th at 1.5176.

This is an opportunity to switch out of your USD before the long term trend resumes towards the imminent target of 1.48.

We have attached both the hourly chart and also the weekly chart. The hourly chart shows the temporary recovery of the USD, and clearly showing the lack of follow through. The weekly chart reinforces the long term downward trend of the USD against the SGD.

The slight resurgence of the USD is due to the recent economic data that suggests that the US economy may be getting out of its stagflation with little risk to a recession. This can only be confirmed with incoming data in the next few months.

We are of the opinion that the situation in the U.S. will get worse before it gets better. In other words, we will see more deterioration till Q4, where we expect to see an economic turnaround which will take up more steam going into 2008.

The FX market moves on relativity, in this regard, the USDSGD is doomed to continue its southward journey through time. Why? Simply, if we are to compare the economic growth in Singapore to the lack of economic growth in the U.S., it is easy to understand why the exchange rate will continue to lose ground. Even, by year end when the U.S. begins to turnaround and into 2008, Singapore will still be ahead in growth numbers. Let’s not forget, both economies are considered developed and matured economies today. The future of Singapore continues to be bright, more importantly; we are creating considerable economic value adding in our own country without the need or help from the U.S.

We will shortly be coming out with an interesting USDSGD solution for investors who are holding USD but would prefer to have SGD.

The Writing is on the Wall for the USDSGD……….1.48!

We would like to raise your attention to a ‘present and real danger’ regarding the USDSGD situation.

Please refer to our earlier articles on the USDSGD and the Singapore equity market outlook published this month.

Given the continuing positive outlook for Singapore, the considerable inflow of capital coming into the financial markets, strong venture capital, private equity and other M & A activities funded by offshore capital…………all point to the fact that the volume of Singapore Dollars will continue ‘spinning’………..that means inflationary pressures will start building up.

Singapore’s 3 month SIBOR or Singapore Interbank Offer Rate which is the interest rate chargeable to the privileged borrowers has been steadily rising from 1.50% p.a. a year ago to its current rate of 3.65% p.a. MAS has just reverted back to its interest rate policy of; ‘moderately tightening bias’. In other words, we believe MAS is sufficiently comfortable with the rate of growth in Singapore and wants to focus on inflationary pressures.

What this means to the USDSGD is that 1.50 is no longer on the cards, instead, 1.48 which we forecasted for year-end may actually happen sooner………….we suspect probably by June 2007.

If your wealth pie is diversified into a number of currencies besides USD, like EUR, SGD, AUD, then you are alright. In other words, if portions of your wealth pie are invested in EUR or SGD denominated investments, then you have a natural hedge in place.

However, if you have a significant portion of your wealth pie in USD, and you are for all intents and purposes SGD base, then, you need to really think about ‘hedging’ your USD position.

Please talk to your banker or alternatively, please feel free to call us and we will be happy to sit down with you to discuss potential solutions to hedge your personal wealth. We also develop solutions for corporate clients and will be pleased to work with your accountant to hedge your profits from potential erosion.

Singapore Equities..............All Time High......What To Do?

Hi Prudent Lee,

Great question. Our earlier article in December, 'To Sell or Not To Sell' is still relevant, however, we would like to share more of our thoughts with you.

If you are already sitting on capital gains in excess of 40%, we would certainly advise you to take some profit 'off the table'. Take for example, if you started out with S$1,000 and it's now valued at S$1,500, it's prudent to take out at least the profits of S$500, which means you 'lock in the profits'.

Assuming you are still bullish about the Singapore equity market, then, let our principal amount ride the the next wave!

In our earlier blog article, we talked about two situations that may impact the Singapore equity market; 1) global slowdown with the U.S. taking the lead and 2) post corporate reporting season, the markets will consolidate before the next push upwards.

We are of the opinion that the above two points are still relevant, however, Singapore has something more significant going over her.

In the last quarter, more than S$500Million flowed into Singapore via private equity and venture capital funds investing in Singapore companies both listed and unlisted. This has helped keep the Straits Time Index well supported and on the up and up.

In the last quarter, more and more MNCs are setting up offices in Singapore plus more and more companies MNCs in Hongkong are relocating their OHQ and RHQ to Singapore. This has caused office and residential rentals to spike upwards, and again...........the equity market to be well supported. Moreover, there is an increasing number of expatriates who have applied to be PRs and making Singapore their home; they use their savings to buy real estate and also invest in the Singapore equity market.

In the last quarter, both IR projects were approved, tendered and awarded. This will create considerable jobs in the whole supply chain of the construction industry plus peripheral service industry/sectors.

Despite the economic slowdown in the U.S., the momentum of intra-Asia trade and commerce plus Europe, India and China looks sufficient to support strong growth in Singapore. There is also the Middle East; Qatar, Dubai.............etc.........the whole country is buzzing! Singapore corporates are tendering for jobs and contracts there.

If all the above has convinced you, then, take out your profits and enjoy it and let the principal investment amount ride....................!!!!!!

USDSGD...........what do we do with a one-way street?

Let’s look at the USDSGD exchange rate in the last 5 years to better understand where we are today and where we may be going in the future. The last 3 years takes into account 2003 to 2006 and we will discuss 2007 separately as we are only into the first quarter.

Appended below is some interesting numbers: -

However, what does these exchange rates mean to us except that the SGD is strengthening against the USD through time, except for 2005. Why?

In order to gain a better understanding of this, we need to reflect the exchange rates to the health of the respective economies during this same period. A good proxy would be the Straits Times Index and the Dow Jones Industrial Index. Take a look at the comparison charts below: -

The index charts gives us an indication of the relative economic health of both Singapore and the United States. In the trough of the recession in 2003, the USDSGD was trading at 1.7880. By the end of 2006, the economic growth of Singapore pegged a GDP growth of 7.9% against the U.S. at 3.4%. We acknowledge that the economy of the U.S. is much larger compared to Singapore, however, on a relative adjusted basis, Singapore clearly outpaced the U.S. Therefore, the strength in the Singapore Dollar reflected the economic health of the country on a trade-weighted basis.

So where are we today? The current USDSGD is 1.5150, where do we go from here? Singapore is forecasted to grow at 6.5% p.a. for 2007, whereas the U.S. is forecasted to grow at 2.4% p.a.

Singapore’s economy is strong and continues to grow with considerable inflow of capital investing in businesses and real assets like real estate. Given the continuing inflow of capital, the Singapore Dollar can only get stronger through time. The housing market is experiencing a short-term ‘boom’ after being in the doldrums the past 7 years.

On the other hand, the U.S. is presently in a state of ‘stagflation’, where inflation is rising and growth is declining. It also has a huge deficit that doesn’t seem to have a solution to cure it. The housing market in the U.S. is weakening and in the sub-prime market……….a meltdown.

Now, looking at 2007 year to date; the USDSGD started out the year at 1.5328 and it is now 1.5150. Our original forecast back in the second half of 2006 called for USDSGD to range between 1.50 and 1.55. I believe we will reach 1.50 within the next three months.

What is our outlook for the rest of 2007? We believe USDSGD will move to an all time high of 1.48 before it levels out. We are not forecasting gurus here nor do we have a crystal ball, however, looking at the relative economic growth rates, the healthy growth in Asia, the strong capital inflow into Singapore, it is not difficult to imagine that we could see 1.48.

What is the conundrum facing the Singaporean investor? The world is getting smaller which is why we went from defining the world as ‘international’ to ‘global’. Therefore, we can’t just look at investing in Singapore alone; the last recession taught us that we needed to diversify our wealth pie globally. Like our government, it doesn’t keep all its wealth in Singapore dollars, it has diversified into a basket of currencies including; EUR, JPY, USD, AUD and NZD.

Our recommendation if you are holding too much USD is to begin diversifying out of USD or dilute your exposure to USD. You can do so by moving into Euro which is a natural hedge against the USD and also against the SGD. In fact, the Euro strengthened against the SGD from 1.99 to 2.04 and it is currently at 2.02. Another alternative is to hedge your USD exposure by buying an option (very much like buying insurance) to insure against any further erosion of your USD holdings.

Please feel free to post your comments or queries and we will be happy to respond to them. You may also contact us at The Panthenon Group at Tel: (65) 6835-8667 to discuss with us your individual and specific issues or situation, we will develop a solution for you.

The Thai Baht

The Thai baht ‘fickle’ minded policy swing is a classic example why we at The Panthenon Group do not invest nor trade in emerging currencies.

The risk is too high, given the illiquidity and more importantly, the lack of professional and expertise in the respective governments to manage the economy and currency.

It’s interesting how within a 24 hour period, the capital outflow penalty policy which attributes a 10% withholding tax on all capital outflows from Thailand was quickly abandoned.

In truth, the days of Thailand’s economic prosperity died when it decided to oust its PM, Thaksin Shinawatra.

The Weakening US Dollar?!

Tel Aviv reported former Federal Reserve Chairman, Alan Greenspan saying that he sees a weaker dollar for the next few years as the United States grapples with a balance of payments deficit.

Moreover, he noted that some countries in particular the oil producing countries with large US dollar reserves have begun to diversify into other currencies including Euro and Yen.

Respectfully speaking, Alan Greenspan has not always been right in his views. In this instance, we tend to disagree with his view.

The U.S. has been battling a balance of payments deficit for the past 4 years and also a domestic deficit for the past 8 years. Yet, it did not stop the US Dollar from powering against the Euro to a peak of $0.83 back in January 2002. Then losing total ground to the Euro when it hit bottom in January 2005 at $1.3580. Again, the US Dollar powered back to a high of $1.1640 in January 2006. As of yesterday, the EUR/USD is at $1.31.

Remember, all the above happened whilst the US was suffering deficits both in its external and domestic accounts. The single most important factor that explains the situation is ‘relativity in growth cycles’. Back in 2002, the U.S. economy was powering up after the dot.com bust in 2000 and coming out of the recession. In 2005, Europe who was the laggard, started turbo-charging and showed stronger growth rates relative to the U.S. In late 2005 and into 2006, it was all about the strength in the U.S. economy right up to the end of Q1, 2006, plus the 17 rate hikes which converted U.S. Dollar into a favorable ‘carry trade’.

The U.S. current account deficit becomes less of an issue when there is growth in the economy. In other words, the U.S. can grow out of its deficit like it did the last time around during the Clinton administration. Of course, this is not going to be the case in 2007.

What is more important is the fact that Bernanke appears to be doing an excellent job in creating the appropriate ‘soft landing’ in the U.S……….THIS IS VERY IMPORTANT. If the soft landing is successfully achieved then the revival of the U.S. economy in the latter half of 2007 is optimistic.

What does this all mean? The near-term prospects for the U.S. is weak, hence, the U.S. Dollar will face some weakness over the next 3 months. Thereafter, it’s going to be data dependent.

Yesterday’s Straits Times had an article about the weakening U.S. Dollar because of the slower growth and anemic housing and potential interest rate cuts. All this are known symptoms for a weaker currency……….nothing new.

Our Call; weaker US Dollar into the end of Q1, 2007, Q2 will be highly data dependent and we see US Dollar strength into Q4, 2007.

To Sell or Not to Sell

Thank you for your comments Thinking Man.

You asked if you have invested in Singapore equities at the start of the year, should you sell now or not?

Please allow us to share our perspective with you. You need to look at the following aspects: -

1. Benchmarking
2. Singapore Economy
3. Strategy

1. Benchmarking

Since you have invested in Singapore equities, then your natural benchmark index should be the Straits Times Index. Year to date, the Straits Times Index has posted a gain of 24%, hence, this is the benchmark in which you should evaluate your investments. Now, whether you have invested directly in Singapore equities or through unit trusts or mutual funds, you need to first evaluate how your investment has done, also how much value adding your broker, banker or financial advisor has done?

If your investments have performed less than 24%, then, you have not done well for this year. You would have been better off just buying ETF - Exchange Traded Funds or Index Options which usually track the performance of the Straits Times Index.

2. Singaopre Economy

Singapore will post a GDP growth of 8.3% to 8.5% for 2006 which is outstanding. However, with global growth slowing down next year, the forecast for Singapore is in the region of 5% to 5.5%. This is a potential marked slowdown.

What does this mean for us if we are invested in Singapore equities? Let's remember that equity prices is the present value of all discounted future cashflows/earnings. Therefore, if the future earnings prospects for Singapore corporates in 2007 is lesser than 2006, then, naturally, the price of Singapore equities will consolidate downwards next year.

Yes, there is a possibility that equity prices could continue to rise by another 10% through to March/April 2007, which is the reporting season for most Singapore corporates. The euphoria could run up to then.

3. Strategy

If you have been invested since the start of this year, we would strongly advice and encourage you to take some 'profit off the table' as they say. Keep half of your holdings to ride up the last 10% into Q1 2007.

When the market consolidates in Q2 2007, then, selectively start picking up equities again. We would also recommend diversifying into bonds and REITs for good yields and potential capital gains as interest rates fall in Q4.